0.3% withholding tax: Facilities, loopholes aiding tax evasion

Commercial banks have been facilitating tax evasion for choice clients by misusing their inter-bank tax-free facilities and have cleared billions of rupees in July without deducing the 0.3% withholding tax.

According to sources in the Federal Board of Revenue (FBR) and commercial banks, these banks have misused the mechanism of Real Time Gross Settlements (RTGS) and Pakistan Real-time Interbank Settlement Mechanism (PRISM) to clear billions, thus defeating the very purpose of the government’s drive to broaden the tax net.

These banks partnered with tax evaders at a time when Finance Minister had expressed his resolve in not backing down from the withholding tax levied on banking transactions valued over Rs50,000, carried out by non-filers, in a single day.

Dar had even gone to the extent of going against senior party colleagues, who were backing traders in their demand to withdraw the levy.

The RTGS and PRISM mechanisms are meant to enable commercial banks to make large-value payments to one and another in real time. The State Bank of Pakistan regulates both platforms and has the authority to give or cancel the membership of any financial institution.

The FBR has taken up the issue with State Bank of Pakistan Governor Ashraf Mahmood Wathra, said the sources. The authorities also plan to call a meeting of the presidents of the commercial banks, they added.

“Some issues related to the implementation of 0.3 percent withholding tax are currently under discussion between the central bank and the FBR”, said SBP Spokesman Abid Qamar, while talking to The Express Tribune.

All banks, including the big ones, misused the facility, said the sources, adding that they used it as a marketing tool and offered their clients to settle transactions in return for nominal charges that ranged between Rs150 to Rs375.

Some of the banks have not yet computerised their withholding tax deduction systems and used the manual system aimed at avoiding the taxes, the sources added.

The government had hoped that the levy would compel the non-filers to come into the tax net, necessary to broaden the extremely narrow tax base. At present, only 900,000 people file income tax returns and many of them show nil income.

Due to this development, the collection on account of 0.3% tax amounted to less than Rs1.5 billion in July, far below the amount the FBR had anticipated. According to conservative estimates, the government would collect Rs3.2 billion every month under this head.

The sources said some of the banks have reported zero collection to the FBR on account of 0.3% levy, indicating they were colluding with the tax evaders.

“If banks are abusing it within the framework of law, nothing can be done, except to amend the law”, said an international tax lawyer Dr Ikramul Haq.

In order to curb this evasion, the FBR would audit the banks statements for the month of August, said the sources.

The statements are due by September 15. The FBR may also charge 0.3% tax on the total volume of transactions carried out by those banks that are showing nil collection.

The government originally introduced the withholding tax at the rate of 0.6%, which was later reduced to 0.3% till September 30. This move was meant to give people time to file tax returns and come inside the net. On income tax return filers, there was no levy.

This has not been the first time that the banks have become a hurdle in broadening the tax base. They have also challenged the federal government’s law that binds them to share information about their accountholders.

The banks have taken stay orders from the courts, which have restrained the FBR from seeking necessary information.